Using Veritas to Construct the "Per…

29-04-2017 Hits:84622 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:79089 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:78935 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:83422 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:79988 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:82295 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:53268 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:81299 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:81299 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:81107 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:86960 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:84978 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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This is the 16th installment of Reggie Middleton on the Asset Securitization Crisis series. It was supposed to end at 15 parts, but by popular demand and partially due to the fact that I can't count, we will be extending it considerably past 20 parts. This is part is a drill down on Doo-Doo 32 member, Sun Trust Bank.

The Asset Securitization Crisis Analysis road-map to date:

•5.     Municipal bond market and the securitization crisis - part I

And here we go...

SunTrust Bank observations

Loan Portfolio:

image015.png

Large exposure to real estate loans: SunTrust Bank (STI) has a significant exposure to real estate loans which together stood at around 60% of its total loans of around $124 bn as on March 31, 2008. Within the real estate category, residential mortgages accounted for the largest share at 27% of the total loans while home equity lines and real estate construction loans accounted for 12% and 10% of the total loans, respectively. Such a high proportion of real estate loans in the loan portfolio makes STI highly susceptible to rising troubles in the real estate market which have not shown any signs of waning over the past few quarters. Further, in spite of the bank's balance sheet asset/liability and risk management strategies, there has not been any significant change in its loan composition over the last year. This causes me to significantly question the capability of management to whether, or even to recognize, the coming storm. The real estate loans have only marginally declined to 60% as on March 31, 2008 from 61% a year earlier, which makes no sense unless the company believes that the real estate market will turn positive some time soon (see graph below for the likelihood of that happening).

Increasing NPAs and charge-offs are on a very strong uptrend in just the one past year, one that cannot and should not be ignored:

 STI's nonperforming assets (NPAs) as a percent of loans have been increasing consistently over the last few quarters, having gone up to 1.88% in 1Q08 from 0.64% in 1Q07 - considerable 294% increase.

image007.png

 Non-performing loans in real estate construction category have recorded the most significant upward movement from 0.39% of total real estate construction loans in 1Q07 to 4.01% in 1Q08 - a NIGH UNBELIEVEABLE 1,028% increase!

The increase in residential mortgages NPLs has also been noteworthy, with NPLs as a percent of residential mortgages rising to 3.95% from 1.30% over the period - an alarming 304%.

image009.png

Gross charge-offs in the real estate loans have also witnessed a stupendous rise over the last year commensurate with rising delinquency levels in the US economy. Gross charge-offs in real estate loans as a percent of real estate loans increased to 0.31% in 1Q08 from 0.04% in 1Q07 (775% - nearly an 8 fold increase) with most significant increases recorded in home equity lines, real estate construction and residential mortgages.

STI's loans 90 days or more past due and still accruing have also witnessed significant increase over the last year, doubling from 0.32% of the total loans in 1Q07 to 0.60% of the total loans in 1Q08. Be aware that this figure is susceptible to manipulation by management - ala Wells Fargo. I haven't encountered any firm evidence of such, but I haven't looked for it with a fine tooth comb either.   

Higher provisions have diminished the bank's net earnings: As a result of rising NPAs and charge-offs, STI has been forced to increase its provisions to cover its expected loan losses which seem to be on a consistent rise. STI's provision for loan losses has increased nearly 10 times to $560 mn in 1Q08 from $56 mn in 1Q07. STI's rising provision levels are eroding its income levels as is apparent from the fact that while the bank's net interest income before provision for losses in 1Q08 has fallen a nominal 2.1% over the last year, its net interest income after provision has dipped a drastic 47.7% over the period. Consequently, STI's diluted EPS has declined 43.8% to $0.81 from $1.44 in 1Q07.

STI's provision for losses as a percent of NPAs has more than tripled to 24.14% from 7.57% over the period indicating the bank's rising expectation of its NPAs converting to losses. However, STI's reserve for loan losses still seems inadequate considering its large exposure to real estate loans. The bank's end-of-the-period allowance for loan losses has dipped to 66.61% as at the end of 1Q08 from 138.61% a year earlier which indicates that rising charge-offs are fast eating up the bank's reserve cushion which is not being sufficiently compensated by the provision charge to the income statement.

Rising Texas ratio a cause for concern: As a proportion of shareholders' equity, STI's NPAs have risen from 4.2% in 1Q07 to 12.6% in 1Q08. Owing to corroding cushion of shareholders' equity and loan loss allowance to cover rising NPAs, STI's Texas ratio (NPAs including 90 days past accruing loans to the sum of tangible shareholders' equity and reserve for loan losses - a measure that proved to be quite predictive of failures in Texas during the S&L crisis) has risen steeply over the past few quarters as depicted below. Keep in mind that I have not performed a full blown forensic accounting of STI, thus I am sure there is a lot of trash in the published, spam out-o-the-can tangible equity figures that would not be in my home brewed calculations. Thus, this Texas ratio is quite possibly understated (100%) means effectively insolvent). I will update these figures for the full Doo-Doo 32 and add my own twist to it in order to make it more realistic in today's environment.

image011.png

Declining trend in real estate construction and consumer loans off set by growth in other loans: Over the last four quarters, STI has witnessed continual decline in its real estate construction loans which have gone down 5.8% in 1Q08 over 4Q07 following a 4.1% decline in 4Q07 over the preceding quarter. However, the other classes of real estate loans have each witnessed a nominal growth with a result that the total real estate loans have increased 4.5% in 1Q08 over the level one year before. This has resulted in the bank's total real estate exposure to total loans remaining nearly same over the year. The continual deterioration in the housing sector has now spread to the other categories of loans as well, including commercial loans, home equity and consumer loans, besides bringing the entire US economy in its ambit. Under such worsening conditions, STI faces a serious threat to its future earnings in the form of rising loan losses. Why this company has not reduced its balance sheet exposure and unadjusted leverage ratio of 6.9x (most likely greater when economically adjusted) is beyond my reckoning! I may not be a successful bank exec, but I can sure see a train wreck coming when that beaming bright light starts to bounce off of my forehead!

SUNTRUST 1Q-2008 4Q-2007 3Q-2007 2Q-2007
US$ mn        
         
         
Loan Composition        
Commercial

              37,306.9

              35,929.4

              34,969.7

              34,362.8

Real Estate:

 

 

 

 

Home equity lines

              15,134.3

              14,911.6

              14,598.8

              14,303.7

Real estate construction

              12,980.9

              13,776.7

              14,359.0

              14,417.9

Residential mortgages

              33,092.4

              32,779.7

              31,603.9

              30,759.2

Commercial real estate

              12,893.7

              12,609.5

              12,487.3

              12,416.3

Total Real Estate

              74,101.4

              74,077.5

              73,049.0

              71,897.2

Total commercial and real estate

            111,408.2

            110,006.9

            108,018.7

            106,260.0

 

 

 

 

 

Consumer:

 

 

 

 

Consumer direct

                 4,192.2

                 3,963.9

                 4,419.3

                 4,391.7

Consumer indirect

                 7,305.2

                 7,494.1

                 7,642.1

                 7,739.4

Credit card

                    807.6

                    854.1

                    668.4

                    396.6

Total consumer

              12,305.0

              12,312.1

              12,729.7

              12,527.7

Total Loans

            123,713.2

            122,319.0

            120,748.4

            118,787.7

 

 

 

 

 

 

 

 

 

 

% Change over preceding quarter

1Q-2008

4Q-2007

3Q-2007

2Q-2007

Commercial

3.8%

2.7%

1.8%

2.6%

Real Estate:

 

 

 

 

Home equity lines

1.5%

2.1%

2.1%

1.9%

Real estate construction

-5.8%

-4.1%

-0.4%

1.7%

Residential mortgages

1.0%

3.7%

2.7%

1.7%

Commercial real estate

2.3%

1.0%

0.6%

-0.3%

Total Real Estate

0.0%

1.4%

1.6%

1.4%

Total commercial and commercial real estate

1.3%

1.8%

1.7%

1.8%

Consumer:

 

 

 

 

Consumer direct

5.8%

-10.3%

0.6%

2.3%

Consumer indirect

-2.5%

-1.9%

-1.3%

-1.3%

Credit card

-5.4%

27.8%

68.5%

5.5%

Total consumer

-0.1%

-3.3%

1.6%

0.1%

Total Loans

1.1%

1.3%

1.7%

1.6%

On an overall scale, STI's total loans are 5.8% up from 1Q07 levels primarily off growth in commercial loans, home equity loans, and residential mortgages. We believe that the strategy of offsetting exposure to real estate construction and consumer loans through higher commercial and residential mortgage loans would not help the bank in mitigating the overall risk to its balance sheet in the form of risky loans prone to higher delinquencies.  My analysts wrote that last bit. You know I'm much more of a smart ass than that. They put it nicely. My take is, "Their out of their damn minds!"

 sti.gif

See the following for my take and research on the prospects of growing your balance sheet in those "other" loan categories:

  1. Capital, Leverage and Loss in the Banking System
  2. The Commercial Real Estate Crash Cometh, and I know who is leading the way!